Abstract

Changing supply structures, security of supply threats and efforts to eliminate bottlenecks and increase competition in the European gas market potentially warrant infrastructure investments. However, which investments are actually efficient is unclear. From a theoretical perspective, concepts from other sectors regarding the estimation of congestion cost and efficient investment can be applied - with some extensions - to natural gas markets. Investigations in a simple analytical framework, thereby, show that congestion does not necessarily imply that investment is efficient, and that there are multiple interdependencies between investments in different infrastructure elements (pipeline grid, gas storage, import terminals for liquefied natural gas (LNG)) which need to be considered in an applied analysis. Such interdependencies strengthen the case for a model-based analysis. An optimization model minimizing costs can illustrate the first-best solution with respect to investments in natural gas infrastructure; gas market characteristics such as temperature-dependent stochasticity of demand or the lumpiness of investments can be included. Scenario analyses help to show the effects of changing the underlying model presumption. Hence, results are projections subject to data and model assumption - and not forecasts. However, as they depict the optimal, cost-minimizing outcome, results provide a guideline to policymakers and regulators regarding the desirable market outcome. A stochastic mixed-integer dispatch and investment model for the European natural gas infrastructure is developed as an optimization model taking the theoretical inter-dependencies into account. It is based on an extensive infrastructure database including long-distance transmission pipelines, LNG terminals and gas storage sites with a high level of spatial granularity. It is parameterized with assumptions on supply and demand developments as well as empirically derived infrastructure extension costs to perform model simulations of the European gas market until 2025. In the framework of the conservative demand forecast of the European Commission, efficient infrastructure expansion (starting from the 2010 infrastructure with all projects under construction being completed) is limited. The constant demand in combination with the newly created import capacities on the LNG (UK, Spain) and pipeline (Nord Stream, Medgaz) side means the gas infrastructure is well equipped to deal with declining European production. The reduction of flexibility provided by domestic production is compensated by flexible LNG imports if the global LNG market remains well supplied. Further scenario analyses illustrate the effects of changing the presumptions on supply and demand: A low LNG price does not increase LNG investments significantly, but reduces the requirements for pipeline investments in Europe, especially in East to West direction on the continent. An assumed decline in the flexibility of LNG imports in Europe, conversely, would greatly reduces efficient LNG capacity additions as the option to flexibly import natural gas is one of the favorable characteristics of such facilities. Consequently, investments in natural gas storage would have to increase substantially to provide flexibility through a different technology. This is also true if flexible LNG is replaced by either additional gas volumes imported via long-distance transmission pipelines from the Caspian region or if it is substituted by gas production from unconventional sources in Europe. Rising demand, intuitively, requires additional investments. The simulation of security of supply emergency scenarios demonstrates that redundant infrastructure capacities and gas stocks in excess of the volumes required to balance supply and demand can be efficient - even if the emergency probability is low. Modeling a one-month disruption of Russian transits via Ukraine and Belarus in 2020 shows that the infrastructure is rather resilient against such a threat. Reasons are alternative routes such as Nord Stream and the infrastructure investments made in the aftermath of the 2009 Ukraine transit disruption. Only limited additional investment in interconnection capacities between countries in Eastern Europe are found to be efficient. However, it also becomes evident that, with an emergency probability as low as two percent, it is efficient to stock up to 10 billion cubic meter of natural gas additionally in European gas storage facilities. Conversely, the infrastructure is found to be less resilient regarding a prolonged supply stop from North Africa as seen for Libya since February 2011. Italy would be affected particularly from a combined export disruption in Libya and Algeria, making significant investments in interconnections with Central and Northern Europe efficient. Additionally, further LNG import capacities would also be efficient to mitigate the consequences of a North African pipeline export stop. These investments in redundant import capacities become more efficient the higher the probability of the emergency. The analysis yields implications for natural gas infrastructure investments. With respect to the general results, it is illustrated how developments in one region (unconventional gas production, a new import corridor from the Caspian region) have significant implications for investments in geographically separated markets. The efficiency of investments in additional storage capacity is greatly affected by developments in the global LNG market and the composition of the European supply mix. Investments in redundant capacity to enhance security of supply are also found to be beneficial even if the probability of the respective emergency is low. However, it is also shown that a detailed analysis is required to identify specific, means-tested investment options - universal infrastructure standards may be of limited value. Furthermore, investments benefiting one region may efficiently take place outside the borders of that region. Important questions for further research, then, are (i) how these efficient investments can be incentivized through a regulatory framework and (ii) who bears their costs, which implicitly includes the question whether or not short-term security of supply is a public good. Regarding the applied analysis, further work may also target an improved modeling of interdependencies of the infrastructure system with natural gas consumption in the power and industry sectors (demand side management).